Abu Dhabi Islamic Bank PJSC (ADIB) Earnings Call Transcript & Summary

A very warm welcome, everyone, to this call on ADIB results on the third quarter numbers. My name is Olga Veselova. I'm the Head of EEMEA Financials team at Bank of America Equity Research. Please allow me to hand over this call to Lamia Hariz, the Head of Investor Relations, ESG and Marketing and Communications at ADIB. Lamia, over to you.

Thank you, Olga. Good afternoon, and good morning to everyone on the call, and thank you for joining us. I would like to welcome you to this Q3 earnings call. Before we get started, just a quick reminder that today's financials and the presentation and all our financial disclosures are already on our website in the IR section and on our Investor Relations app. I have with me on this call, Mr. Mohamed Abdelbary, our Group CEO; and Mr. Ahsan Akhtar, our acting Group CFO. And on this occasion, I would like to congratulate Mr. Mohamed for being confirmed as the Group CEO of the bank effective immediately yesterday. The agenda for today, it's quite consistent with the last quarter. So we will start by giving a quick highlight on the bank performance. It's followed by a detailed analysis by Ahsan on the financial performance. We will then conclude with our guidance, and we'll open the floor for Q&A. With that, I will now hand it over to Mohamed for a quick introduction on the financial performance.

Thank you, Lamia, and good morning, good afternoon, everyone, and thank you for joining us on today's call. First of all, I'm deeply honored by the trust placed in me from the Board of Directors to lead this institution at a time where we are achieving strong momentum and exceptionally strong results. We're also very pleased with our performance for the first half of 2024, all the way into the third quarter of '24, and we'll talk about this in more details on that call. We've delivered AED 4.6 billion of net profit, which is a growth of 24% year-on-year. And if we were to adjust that for the tax impact, which was not there last year, we have grown our net profit by 33%. This has also led us to deliver a return on equity of 29% and I believe that's probably still one of the highest ROEs in the local market. So our franchise also is growing from strength to strength. So from a client perspective, we have welcomed 150,000 new clients to ADIB, taking our total now client base to 1.4 million clients. Revenue perspective, we have grown revenues by 19% again year-on-year. But I think the encouraging part is that as we go into details, we'll talk a bit more about the components of the revenue growth which is supported by strong underlying KPIs as well as a good contribution from nonfunded income as we've always been signaling that to be an important part of our strategy. From a cost perspective, you would have seen that our cost-to-income ratio now has dropped to 29.1%. For those who have been following ADIB for some time, if you just go back a few years, that number was probably in the 48%, 47%. And from that onwards, we have always been signaling that we will be bringing that ratio down to market levels from a combination of revenue growth but also strong cost discipline. But more importantly, we will be investing through the cycle, and it's definitely been paying off not only this year but last year as well. Asset perspective, we have now reached a total asset base of AED 223 billion. That's a growth of 20% year-on-year supported by very healthy growth in our customer financing and also supported by a strong funding base. So again, when we go into details, we'll see that the customer financing has been contributed by our 2 main businesses, retail and the corporate bank. Retail bank, a very steady growth. We are adding between AED 1 billion to AED 1.2 billion of net balance sheet every year. That's the difference between gross sales as well as natural attrition. But also, we are very happy to see the progress we have seen on the corporate bank side, where we had a very strong half 1. Quarter 3 was on the top line, actually slightly muted. But when we go and talk about the details and talk a bit more about some of significant repayments, which happened in that quarter because actually underlying, it was as strong as the second quarter of the year, but we did have some of expected repayments, particularly from the Dubai business as well. From a credit perspective, again, KPI, which we've also signaled to the market that we will be dealing with that and that's our NPA ratio. We are at a 4.4% NPA ratio. That number was a couple of years ago at 8.8%. We started the year at probably 6% now down to 4.4%, and we are guiding the market that this number will actually be sub 4% by the end of this year. Moving forward, we are on Slide 5, a bit on our strategic highlights. So again, we are on track in executing all our initiatives. One of the initiatives also we've spoken about recently is the launch of our Vision 2035. And that's quite important for us because we are setting a road map for where we want to take ADIB in the next 10 years, and it's split between 3 phases. So Phase #1 is clearly what we are seeing in the next 12 to 18 months, which is our normal budget cycle. But then we have a refresh of our corporate plan, which is the 5-year plan, and it's a timely launch because our initial plan, which was launched in 2020 is coming to an end in 2025. And it's quite timely that we relook at this again and see what has worked well and do more of it and what needs to be tweaked given the change in the environment. But then the more important part is having a 10-year view because the intention is to take ADIB to a complete different level supported by particularly Gen AI technology and a transformational ADIB venture-led strategy, which will capitalize on the latest technologies, but also a lot of fintech and venture partnerships. Let us move forward on this, Lamia. Okay. With that, I will ask Ahsan to take us through the numbers starting from Slide #7. And then afterwards, we will be opening up for Q&A to take your specific questions. So Ahsan, please, over to you.

Thank you so much, Mohamed. Good afternoon, good morning to everybody on the call. So we will just proceed with a quick summary of the results. As Mohamed mentioned, net profit growth was very strong this year, 24% year-on-year. Profit before tax reaching AED 5.2 billion, which has represented a growth of 33%. And if we incorporate tax the growth was actually 24%, so very healthy growth. In terms of our key drivers, revenue for the first 9 months of 2024 increased by 19% reaching a record high of AED 8 billion compared to AED 6.7 billion one year ago, and this has been supported by increase in funded income and nonfunded income. And the key drivers being the growth -- strong growth that we have witnessed this year in terms of our business volumes stemming across all our business segments, pretty much retail and wholesale business delivering strong results and the continued strength of our fee-based business as well. In terms of balance sheet, we've had a remarkable year as well. So balance sheet has grown by 21% to reach AED 223 billion, and we will go into further detail when we do the slide subsequently, but this has been aided by growth in financing assets of 19% year-on-year across both the businesses. And we have also increased our investment portfolio by 25%, mainly Sukuk, which increased by almost AED 6 billion this year. The balance sheet has been adequately funded. So we traditionally fund the balance sheet before we finance. So deposits have actually increased by a healthy 19% this year to reach AED 180 billion and we've maintained a very good healthy funding mix with CASA growth contributing 10% year-on-year. Moving along on Slide 8, we just want to highlight the impact of the UAE corporation tax that was introduced at the beginning of this year. Our effective tax rate is 11.4%. And the overall tax charge being AED 588 million, and the bank reported a net increase of 33% in net income pretax levels. Moving along, as we go in to Slide 9 on the income statement. If you look at the top left chart, we are seeing consistent growth quarter-on-quarter in our net profits which increased by 2% versus last quarter as well. And we are very, very proud to say that we've actually delivered this, including the impact of corporation tax. And if we exclude the taxes, then we've actually had 5 steady quarters of healthy growth, and we have managed to deliver our highest quarterly profit in the history at AED 1.6 billion this quarter. Within this revenue increase and the balance sheet increase, funded income has actually increased by 9% year-on-year on the back of strong growth in the customer assets. Non-funded income has increased by 41%, and this has been on the back of fee and commission income increase of 33% as well as investment book increase of 41% year-on-year. Non-funded income is now contributing 39% of our balance sheet, and we have actually made a conscious effort in increasing in the nonfunded income as we move into the rate cycle environment. Effective cost discipline has resulted in a moderate expense increase of 6%. And from a segmental perspective, retail and wholesale businesses have positively contributed towards the net profit. If we move on to Slide 10, on the funded income. As I mentioned, we have now increased this by 9% year-on-year to reach AED 4.9 billion. In terms of our net profit margin, there has been a slight contraction compared to 1 year ago where we were at 4.48%. So we are now at 4.46%. Sequentially, there has been a small decline and this has really been because of the slightly higher cost of fund that we had in Q3, which we hope that given the fact that we have a very high proportion of time in Wakala deposits, the cost of deposits should start to come down as we factor in the impact of the rate cuts, which have started already. One important thing that I would like to highlight is the gross margin, and they have continued to increase. So this is essentially the gross yield on our financing assets which has continued to increase. So we are now at 7.5% compared to 6.1% at the end of last year -- 9 months last year, and it has also increased compared to first half position. So that has actually been very good because we operate in a competitive environment, and we've actually taken a very disciplined approach in terms of our pricing, hence preserve the margins on our financing assets as well. On the funding side, we have -- I mentioned about the cost of fund. In terms of our NIM sensitivity, this remains unchanged at AED 120 million for every 50 basis change in our interest rates. Moving along. On the nonfunded side, and I previously mentioned that had increased by 41% mainly because of the increase in fee and commission. We've had a record year in terms of acquisition in our card portfolio, and we have seen higher spend and sales volumes, and that has been reflected in our cards income increasing 72%, primarily on the fee and commission side. In addition to that, we've had higher processing fee on our assets, retail primarily and on the risk participation fee, this is really wholesale banking. So the fee and commissions that we actually received on the loan portfolio as well as some trade assets as well. On the operating expenses side, as Mohamed had mentioned, during the time 4 years ago, where our cost-to-income ratio was as high as 48%. We've managed to bring it down to 29% through several efficiency initiatives, digitalization being one of them. Our expenses now have grown single digit this year of 6% compared to our revenue growth of 19%. So we've actually achieve 3x more revenue growth this year compared to our -- and which has essentially opened up the jaws in our balance sheet. The increase in expenses have come in primarily 2 categories. Firstly, investment in our people, which is strategic to our -- the way we operate. And secondly, we've also increased expenses on our variable side that has really taken the increase. So that's the incentive that we pay on new acquisitions. Second primary reason for the increase in the expenses has been the digital front, an area which is of particular focus to us to the bank as a whole as we move forward into the AI world. So despite all this, our cost-to-income ratio has been a very healthy 29.1%, which represented a decline of 3.6% compared to 32.6% almost 1 year ago. Moving along on the impairments, the net -- so the bank recognized a total impairments of AED 448 million during the first 9 months of the year compared to AED 571 million last year. So there have been some property-related reversals as well because of the increased collaterals as well as some sales as well. But it is worth mentioning that we have not seen any credit quality pressures in retail or wholesale banking and the overall credit environment remains benign. We've had very good delinquency levels. And as a result, our cost of risk has been stable at around 49 basis points, which is well within our guidance of 40 to 60 basis points, which we have done at the beginning of this year as well. On our nonperforming assets, we've actually had a very good story. We've made a conscious effort in terms of reduction of our NPA books which has actually resulted in assets -- nonperforming assets reducing by 21% which is almost AED 1.6 billion from the beginning of the last year and AED 1.1 billion compared to the beginning of the year. This has really been driven by legacy portfolio recoveries as well as some write-offs that we have taken. As a result, we are now at a historical low in terms of our nonperforming assets ratio of 4.4% as Mohamed had mentioned. This compared to a high of, say, approximately 8.8%, almost about 12 to 18 months ago. We will continue to see the declining trend as we finish 2024, and we are very hopeful of further improvements here. On the coverage, both in terms of cash coverage and cash plus collateral, the ratio, we've actually built up significant provisions this year. So we are now at 78% compared to 70% at the beginning of the year. If we add the effect of collateral, and this is particularly important from an Islamic bank point of view, the coverage is almost twice at 154%. Moving along, as far as the balance sheet is concerned. So we have actually crossed AED 220 billion mark to reach AED 223 billion with an asset growth of 21% year-on-year. If we exclude the impact of FX that we encountered in our Egyptian subsidiary, the bank actually -- the total assets were at AED 233 billion, which was an increase of 21%. The key contributors being customer financing which increased 21%. And then as I previously mentioned, we have increased our investment book in a conscious effort to lock in high rate investment-grade assets that will help us as we mitigate the impact of the rate impact next year. As we move along on the customer financing side, the bank has added AED 20 billion new financing this year, and this reflects our retail business gaining new market share, and we've seen some landmark deals closing in our corporate business. Gross financing assets increased by 16% this year and 20% if we exclude the impact of FX in our Egyptian business. And this growth has been particularly spectacular in both our retail portfolio as well our wholesale business across the GRE space as well as on the corporate business. In our corporate business, we had some repayments as well in quarter 3, as Mohamed alluded to. So our growth rate is 4%. But in our government and public sector, we grew 33% and 21% in our retail business. If we dissect retail, which is the bottom right-hand chart, all our flagship products actually had a very decent growth. So we are #1 in terms of market share in products such as home finance and personal finance with home finance increasing by 41% year-to-date, aided by successful product campaigns and tie-ups with dealers. In our wholesale book, we've had a good mix of wholesale and corporate assets. This has actually enabled us to enhance credit quality and bring stability to capital given the RWA benefits that come with it. There has been strong demand across most industry segments throughout the regions slightly offset by some regions. On Slide 16, this is a snapshot of our total investment book, which has increased to reach AED 28.8 billion by the end of September. This represented an increase of 18% since the beginning of the year and the key additions that have been made has been in the investments carried and investments amortized costs. Again, as I previously mentioned, these are fixed rate assets of longer duration at decent yields, and they will serve as natural hedges in a declining rate environment as we move forward. On the customer deposit side, the increase has been 14% and 19% FX-adjusted. Essentially, we have had a history of increasing customer deposits ahead of the growth that we do in our financing book, and we maintain adequate levels of liquidity to ensure we have sufficient fund to support asset growth. So if you look at the right-hand side of the chart, the key drivers of the growth has been retail where growth has been AED 7 billion, primarily all driven by CASA as you can see in the bottom right-hand chart. So AED 6.4 billion growth in CASA, there is primarily all retail business. But in order to fund the asset growth that we had here, we increased wholesale deposits as well by AED 10 billion, which has a shorter maturity duration, 3 to 6 months. Some of these go 12 months as well, but they started to reprice, and that should really help us reduce our cost of funds later in the year. Our CASA ratio stands at a very healthy 62% and this continues to support our low cost of funds, especially in the UAE business of approximately 1.7%. Moving along on the capital side, ADIB has maintained robust capitalization as well as liquidity levels. I'm proud to say that despite the fact that the balance sheet has witnessed very strong growth during 2024, capital adequacy levels are at 70.6%. And I'm particularly happy to say that our CET1 levels which is at 13.4% today is at the same level, which we were at 1 year ago despite all the asset increase. So clearly, we have been optimizing capital as well and we've been positioning ourselves in the right direction to ensure that the right decision on the dividends can be made in line with the bank trend. On liquidity front, advances to stable funds ratio has been very stable around the 77% mark. Financing to deposit is at 75% and our eligible ELA ratio is still very, very healthy, increasing to 20% by the end -- by the third quarter. So in terms of our outlook and guidance, we've seen an increase of 16% in year-to-date increase in our customer financing assets. We continue to take the view that there will be asset growth. So we are expecting greater than 16% as full year guidance. Net profit margin, which was 4.46% we've actually revised our guidance to say that this will be higher than 4.3%. In terms of cost of risk, we are consistent with what we have been guiding every month. So again, between 40 to 60 basis points, we are at 49 basis points today. Our cost-to-income ratio, which is at 29%, we maintained guidance of less than 30%, which is consistent with what we have been seeing all along. Finally, in terms of return on equity, very healthy 29%, and we still believe that we will be below the 30% mark with greater than 25% for the full year. As a result of this, I conclude the management presentation, and we open the floor for any questions that you may have.

We will now go to the Q&A session. [Operator Instructions] The first question goes to Shabbir Malik from EFG Hermes.

Mohamed, congratulations on the new role. I wish you all the best. I have a couple of questions, please. The first one is regarding your margins. So if you look at your time deposits, what proportion of your time deposits are likely to reprice lower in the fourth quarter? And is it fair to assume that some of the pressure on NIM this quarter has been because of the growth in the investment book, which has been pretty strong this quarter? My second question is around your ADIB 2035 strategy is if you can -- would it be possible to share any financial metrics or targets -- long-term targets that you're eyeing with this strategy. And my final question is in terms of your -- you're currently not a D-SIB. Is there any D-SIB threshold that the Central Bank looks at and where would you stand relative to that? So those are my 3 questions.

Thank you, again for your kind words. I'm very happy to be entrusted by the Board with that position. And I've been in that level since March. So I think it's almost like transition to the job. But again, very happy and proud to have been chosen and trusted with this responsibility. And let me take your question one by one. Please tell me if I'm missing anything. So I'll start with the last one. In terms of D-SIBs, there are no discussions with Central Bank at this stage whether we will be included or not. Having said that, if we were to be included, actually, we're in good shape because I feel or the sense I'm getting this is not nothing formal, but we are almost being treated as D-SIB. So whether it's from a capital liquidity and all other views, we are there. And if there is ever a position where we need to be included in that category, I think we will be in good shape, right? So even from an internal perspective, you measure us against very specific KPIs, which would be aligned to other D-SIBs as well. But just to confirm there are no discussions with the Central Bank on whether we should be included or not. The second question on profit margins. So what's the story on profit margin? So I think what you've seen consistently over the last 9 months is that our gross yields on our financing book has continued to grow. And that's driven by, number one, is that we have been very diligent in our pricing on the retail side and the corporate bank has also benefited from clearly higher rates because it's predominantly on a floating level. And that's reflected on our gross yields. Now what has happened is that because we have grown, I would say, at pace, there was a need for us to ensure that we follow the bank's strategy in terms of ensuring that we always run a few steps ahead of our financing book, right? So we always fund before we finance. And hence, we have been growing slightly faster in terms of attracting profit paying deposits. And hence, also you would see that our CASA ratio has dropped to 61%. If I were to bifurcate the 61% approximately in retail bank, 90% is CASA ratio, so very efficient that's only 10% of that is profit paying. But on the corporate side, it's 28% and that is not unusual, right? So your corporates would demand a specific return and are very price sensitive, and they should be rewarded as such. And hence, you would see that the compression in net profit margin is not on the asset side, but it's more in our kind of pace in terms of raising deposits, which are profit earning. Now what will happen in quarter 4 on the back of that? Just to give you some perspective, we have AED 180 billion of deposit base. If I focus maybe now for a second on the UAE side, approximately AED 100 billion or so is in -- sorry, AED 140 billion or so is between CASA and STI, what we call short-term investment accounts leaving us with approximately another AED 40 billion in Wakalas. Of the AED 40 million, AED 22 billion are being repriced in quarter 4, right, which is a big amount, and that is not by coincidence. When we positioned our maturities for Wakalas, we always anticipated that half 2 will be an inflection point where rates will turn. So we came at the beginning of the year, we encouraged 9 months booking. Last year it was 1-year booking coming in half 1 we encouraged 3 months booking, right, for the clients, we made it more attractive for them, basically, giving a bit of a sweetener in that maturity bucket. And now we're sitting with AED 22 billion, which is more than half of our clients being repriced in that quarter. So hopefully, this will mitigate some of the costs we have. But we are also conscious that it is -- it will take time to reflect. And that's why we're guiding the market, we think we're going to still be above 4.3%, but the nature of the book will allow us to hold margins higher for longer. On the 2035 strategy, so we will be sharing in due course, some more insights but the 10-year strategy, will it have very specific KPIs like a corporate plan, probably not. You will get numbers for the 5-year plan, right? This is very specific. But the 10-year is a vision, right? We are almost sitting back and saying, where do we want to see ADIB in 10 years' time. And we have a very clear of where that will be and how we will achieve it. And as I said, it's predominantly actually 1 or 2 pillars only. It's not going to be 5, 6 pillars. It's 1 pillar, which will filter to the entire ecosystem of the bank, and it's driven by Gen AI, technology, fintechs for one reason is to make the customer experience as seamless as possible and to be able to provide the bank of the future who goes to the client, not the client comes to us. So let me know, Shabbir, if I missed any of your points, and I can elaborate.

No, that's been very helpful. And if I may squeeze in one more question. In terms of retail banking growth that you've seen this year, is it a combination of market share gains and growth in the market? Or is it just -- it's primarily driven by growth in the overall market in the UAE?

So if I may say, I think we've taken market share, happily so. And because if I compare our growth rate with the market growth, I think we've more than 1.7x of market growth. And where did it come from? It has come from -- if you look at between the product link for us home finance, personal finance and auto. So home finance is our flagship. We've really been very successful on the home finance side. Personal financing, we're probably #1 in terms of bookings at very attractive rates. I think, for us and the client and auto finance is okay. We know that auto finance, the returns are not big usually, but it's a very important product for us because it's an anchor product, right? You want to give a holistic value proposition to the client and auto finance has to be there. Just to give you some perspective from a UAE book perspective. So if everyone we would only look at what is the UAE book across the entire industry, we would be #1 in home finance and we will be #1 in personal finance as well. Auto finance is probably #3 or 4 at AED 8 billion, AED 9 billion of booking of assets. And when it comes to cards, we are probably #1 in terms of spend by far. So I wouldn't quote numbers, but we have the numbers there, I think, available probably with some of the acquirers, but we are #1 by far in terms of monthly spend across every card we issue.

Next question goes to Chiro Ghosh from SICO.

So 2 questions. The first one is related to the -- I can sense a sense of recovery. A big chunk of recovery is coming from the other section. Just help me understand if I understood it right. So if you can give some clarity. So in the financial statement, if I look at it, I think there is a AED 89 million, it looks like some AED 89 million worth of recovery had come. If you can throw some light on that part of it. Second is the previous point, did I understand it correctly that -- so it's out of the AED 46 billion -- AED 40 billion-odd Wakala, AED 22 billion will reprice very soon. So I just want to get a sense in a downward-trending interest rate cycle, how do you overall see your balance sheet? Basically, I'm sure your asset yield will also come down. So for every 25 basis point drop, where do you stand at this moment? And third one, also very quickly, if you can touch upon. So your NPL coverage seems to have improved quite a bit. Where do you plan to -- what would be a comfortable limit for that?

Chiro, so again, let me start with the last one first. The NPA ratio currently at 4.4%. We have one more big hit to make, hopefully, in Q4, which will take us below the 4%, right? And this is not, as I said, by a chance, it's a strategy we started probably a couple of years ago, very focused on dealing with legacy exposures. It's not -- no help by third parties, that's all internally driven by the bank's team, and we've really focused in terms of not -- and it's not write-offs, this is actually write-offs and recoveries. We've sat at the table and we've closed out all the legacy exposures, which have been out there for 10 years. One more left big to do, and we're going to be at sub 4%. And I think probably better than market because I think market average is probably between 4% and 5%. So that's on the NPA side. On the profit margins, yes, as I mentioned, it's AED 40 billion, of which AED 22 billion repriced in Q4. We are doing, obviously, the best we can to ensure that they are being repriced at the revised curves. But I also want to make sure that the audience understands that this is a very competitive market. So it's not a one-for-one. It's not that because 56 bps have dropped it needs to reprice -- renew them. They're very important for us. But it is gradual and it will take time. But will there be reduction? 100%, there will be reduction in our cost of fund on the back of some of these specific Wakala repricing in quarter 4 and onwards because that, by the way, the delta of these numbers will also come in Q2. But I think by Q2, the rest of the AED 22 billion would also be up for renewal as well. In terms of the impairment, you mentioned some recovery, absolutely correct. That's part of the strategy which we have been doing in terms of fixing some of the legacy books. I think you mentioned one specific one. So that's actually part of us realizing or closing out some of the legacy exposure, we were able to write back some of the provisions. But also, we did an assessment of collateral evaluation, which has given us some upside in terms of the impairments we had initially been taking on these collaterals and we were able to realize some money as well. Again, in the bigger context, it's not big because as we said, it's -- the whole thing is only AED 80 million between actual recoveries and impairment evaluation, we are reporting headline AED 1.605 billion after tax. So that's probably a fraction of it. But I think that's something which we wanted just to call out.

Just on the previous one. So at the end, for every 25 basis point rate cut, are you agnostic to it? Or it will net-net have a negative impact on your NIM?

No, there will be negative, right? So our sensitivity is for every 50 bps, there is a AED 120 million impact because at the end of the day, it's a double-edged sword, right? So you have the book from the corporate side, which reprices fairly quickly down. I'm talking about the financing side. It's linked to a benchmark, rates come down, immediately rates will come off. But what we have done is that of our AED 140 billion or so gross assets, approximately AED 64 billion are the ones which are shorter-term repricing. The remaining ones are predominantly fixed rate longer term beyond 9 months to 12 months. So they give us air cover. And hence, as rates go down, yes, there will be the impact I mentioned, but it's probably going to be much more muted than what you will see in the market as well.

Congratulations on your new profile.

Thank you so much. Appreciate it.

[Operator Instructions] We are going to our next question from Abdulaziz [indiscernible] from Hassana.

Congrats on the new role. I just have 2 quick questions from my side. On the net funding or net fees and commission income, what's the driver of sequential improvement? And how recurring is the number in this quarter? Has there been any also classification -- accounting reclassification? And on the second question, if we look since the first quarter 2024 we see the financing book increased 16%, while interest income or funding income has increased only 8%. Funding costs increased at a much higher rate which impacted the net funded income. Just can you explain the dynamic there and why we haven't seen book impacted on funding -- net funding income positively?

On the first question, the net fees and commission is an amalgamation of many things. But I think the 2 main elements are the card fees which we earn on our card business. As I said, I think our ability or the client spend we have is quite healthy, I would say. And it goes back to the type of clients we have. So again, 1.4 million clients, of which 650,000 are UAE nationals and they tend to be quite healthy in the spending habits. And hence, we are earning a lot of good commissions on that. In addition, that we've also introduced a lot of new product features into our -- particularly I'm focusing still on cards is that because the nature of our clients are more, I would say, transactors versus revolvers, right? So it's sometimes a good problem to have or not because if they are transactors, your credit risk is low, but you also earn a bit less on these cards. So what we've introduced is what we call easy installment plans, which are fully digitized. I know it's been in the market out there. But what we have done is we make it absolutely simple on your mobile app, 1 click and you immediately are able to defer your payments with a fairly low fee component, still better than if you leave them at 0 because they are transactors, but it did capture a lot of fee income there as well. We've launched it only a few months ago, and it's already showing in our fee income. So that's on the card side. The second component of our fee component is the wealth management part. So wealth management also has done extremely well. We've revamped our entire strategy. We have introduced more products. We launched a few new funds on the back of ADIB capital, which have helped us really to capture some of the fee income. And that's part of our strategy to ensure that we have a good mix between funded and nonfunded income. If I move to your next question, I think you've spoken about the components between the profit earned and profit paid on the balance sheet. So again, I think the point is that because CASA by definition takes time. So despite that we have a very strong CASA base, we do add, as I said, we've added 150,000 new clients predominantly, if I would say, a lot of them are UAE national salary transfers. That's all beautiful CASA business for us. But the pace of us putting on financing has almost put us in a situation where we went slightly more to the cost here funding mix, which is fine because I would never stop the business because of waiting just to CASA to build up. I would like the CASA to be sticky. It takes time and it will stay with us. So we kind of front-loaded the funding based on the Wakala side, which has impacted our funding cost. So if you actually take the 2 lines separately, look at profit earned versus profit paid and quarter-on-quarter, you will see a very healthy pickup. But you're absolutely correct, the funding cost in relation to previous quarters has grown faster, which is a conscious decision we made but what has happened is that because it was funding long-term fixed assets, it means that as rates come off and we price down our Wakalas, the money used to fund the financing side will actually stay longer on the financing side. And accordingly, we will have a slightly muted, I would say, soft landing when rates start coming off again.

Our next question goes to Naresh Bilandani, JPMorgan.

It's Naresh Bilandani from JPMorgan. Congrats on a very good set of results. Just 2 quick questions, please. One, could you please share any thoughts on these new credit provisioning standards that have been promulgated by the Central Bank? And how would these affect your medium-term cost of risk and provisioning if fully implemented today. I know you've been -- you're guiding that by the end of this year, you should see a reduction in the NPA ratio dropping to below 4%. Is this drop going to be led by recoveries or write-offs led by these new provisioning standards? So if you can please share some light on that on both the standards as well as how they affect your medium-term credit profile -- credit quality profile, that would be super helpful. That's first. And second is, and I appreciate this, you have to finalize this, but keen to get some early thoughts on how you're expecting the key metrics like volume growth, NIM and cost of risk to evolve through the course of next year so that we can model this accordingly.

So let me start with the credit standards first. So there were 2 elements in your question. One is as you go below 4%, what is driving that? It's predominantly a recovery of a big name, which we're working on. We've done good progress on it. It's -- we're in execution phase. I think the negotiation, everything is done. It's a matter of time, Inshallah, that we execute. So we're going to go sub-4% by fixing one more big exposure, legacy exposure, 10-plus years on our books, which is going to take us below 4%. So it's not a writeoff, it's not an accounting writeoff, it's a pure settlement of a legacy exposure. That is the first one. In terms of the credit standards, I think when we analyze the situation, first of all, we were -- the announcement was that it will be implemented 1 month after it is published in the gazette. We have not seen the publishing yet, but we are working on the assumptions that probably this year it will come into force and full year next year. What it means for ADIB specific, I think there are a few categories there, which we need to think about. One is the point on the 1.5% on RWAs for Stage 1 and Stage 2. There's really no impact on this one, we are covered. And I think it shows in our financial statements, if you do the math, we are good on Stage 1, Stage 2. The second one was looking at your specific provisions in your reserve in your equity base, we have approximately AED 190 million there. which as per the new standards, you have to assess how much of it will have to go back into your P&L. Again, we are comfortable because when we actually were slightly proactive in that measure, and we've started to build almost overlays in terms of meeting some of that exposure. Hence, we don't see a big impact in Q4 of that. The third element was looking at your collateral dilution over time for your NPA book. So I think now you can only carry collaterals up to 5 years and you will have to dilute the dependence of it year-on-year. But this is again a going forward kind of standard. So it's not taking the stock, but it's going forward. Are we particularly concerned about it? I would say no. Because even without that standard, we would have done that because by end of the year, our provision coverage ratio will probably be above the 80% without collaterals. And if you fast-forward that a couple of years ago, I think we would anyway inch towards a full coverage of any of the legacy exposure, which will be more than 5 years and not resolved yet. So we are actually in a good space when it comes to new credit standards. But will there be an impact? Yes, there will be an impact. Will it be significant? I don't think so. And we would have a normal course of business anyway taking some of these provisions as well. Sorry, I missed any of your questions? Sorry.

Volume growth, NIM and cost of risk.

Guidelines for next year. We haven't finalized that yet, but what I usually do is -- and this is not a statement to be taken like hard and stone but look at your GDP growth, I think the Central Bank is guiding towards a 6% growth of GDP next year. I would say 1.5x of that is probably a good proxy for asset growth. So maybe asset growth will be next year at 10%. And accordingly, if you were to look at revenue growth, probably between, again, 1.5 to 2x of where you close this year. Again, very soft starting numbers to work with and then we will take it from there. In terms of cost of risk, I don't think our cost of risk will materially change from where we are today. We are currently at 49 basis points. So -- and we are anyway guiding between 40 and 60. We have not changed our underwriting standards in any significant way, which would suggest that the cost of risk will change. Now we are, as we said, more open to the expat segment for some time. And we've been very successful in ensuring that we book the right assets from that segment. But just to give you a context, from our retail book, which currently sits in the UAE at around AED 70-plus billion, 82% of it is still financed to UAE nationals which means that even as the expat book grows, it will always be the smaller portion of our retail financing book. So again, answering your question, I don't think the cost of risk will materially change into next year as well.

Our next question is from [ Murad Ansari ] from GTN Middle East.

Congratulations, Mr. Mohamed, on the confirmation of the role. So 2 questions from me. One is on deposits. So you've mentioned that you prefer to fund the book before you grow the loan book. And we've seen over the past 2 quarters, the mix on the CASA side deteriorating as obviously, looking to grow deposits quickly, and that's coming largely through term deposits. Just wanted to get a sense of how you're looking at CASA mix evolving, i.e., I mean, are we going to continue to see deposit on the term book growing at a faster pace to keep track with loan growth. And meaning that we do see some margin impact as a result of that. And secondly, on -- also on deposits, I mean, is there any seasonality which kind of kicks in, in the second half of the year because I was just looking at numbers. And it seems that the second half CASA deposit growth tends to be slightly weaker than what we see in the first half. So your comment on that. And on public sector loans, we have seen a sequential decline. And I think you did mention something about early repayments. So just your thoughts on that.

So first of all, let me address the point on the CASA for next year as well and the mix. We take these decisions very carefully, particularly at ALCO level, right? So -- and it's a very calculated decision because at the end of the day, whether the CASA ratio is 61%, 65% or a different number, it has to make sense at the bank level, right? So if we believe that our pace of growing assets is diluting our margins to the extent that it's hitting our profitability, we will just not do it, right? And we will take it slow. But this year, all along, we've seen that the asset buildup and the momentum justified all the deposits we've taken. And hence, while the net profit margins might seem to be stagnant or slightly inching down in the last quarter, net-net the bank is still making more money in a very accretive way. So fast forward, the same logic for next year, we will continue to do that assessment as we look at growing our financing book, our CASA book also is growing at a specific pace. Now we have more initiatives to ensure that maybe we accelerate that a bit. But if it means that we maybe go to the market and raise a few more costlier deposits, we will definitely do so as long as the sum of the parts is bigger than just halting the finance origination. So that is, I think, on the CASA side. But again, I want to reiterate 2 important numbers. Retail is still at 90% CASA, right? There's nothing more, I have not seen that before. And I would be -- I would think quite aggressively. I want this 90% to be higher because there will always be an element of Wakalas in the retail book. It's really the corporate side where the sensitivity on pricing is just going to be an element of how much more cash management business you are able to originate in terms of either escrow accounts or cash management because other than that, the corporate will always be wanting a return on its deposits and hence the low rate. But having said that, next year, I think the ratio will slightly pick up from where we are, just by the fact that rates are also coming off and the lower the rate, the less sensitive the clients would be. So that's on the net profit margin side. Sorry, you had a second one was?

Seasonality.

Seasonality, no we don't see that because what you might see is that in terms of percentage, the growth in CASA is lower than Wakala. But percentage-wise, because the base is also different. Actually, in terms of absolute amounts, we've grown almost AED 10 billion of CASA in 9 months. So that's also unheard of in this rate environment, still managing to grow AED 10 billion of a base of AED 100 billion, that is big. Yes, we've grown AED 17 billion maybe in Wakalas, but the AED 10 billion still came in and I think this will continue to be the case for this quarter and for next year as well.

Yes. I mean I agree, I think demand deposit growth has been quite strong. I was just looking at sequential numbers. So if I look at third quarter CASA deposit base versus second quarter, I think this quarter has been about roughly, I mean, combined about AED 800 million in growth just from CASA. So I understand the growth in term deposits and that obviously is calibrated according to your asset book growth. But just the absolute number I thought -- I mean, I look at previous years as well, I think it seems like third quarter probably has some seasonality with demand deposit and saving deposit growth even in absolute terms, is a bit lower than what we see in the first half of the year. So that was what I was referring to.

Yes. No, I think right, maybe one point, maybe we didn't have to mention as well is that if you recall in the first and second quarter of this year, particularly, we had some very successful campaigns. If you remember the salary back campaigns we had, where -- and this was, I think, one of the kind in the market. Now we are happy to see that other banks are doing it as well, that's okay, right? But we've actually done it, and we've managed to grow our CASA balance quite aggressively. And once we achieved the target of that campaign, we stopped it. So by this stopping the salary cash campaign, which is almost bring your salary and you get 100% back of your salary, if you meet certain criteria, this has boosted our CASA balances quite significantly. We stopped it there's a slowdown expected, but we will have more campaigns coming in as well.

And just the second question I had on the public sector loans. We saw some decline in absolute numbers. I think about AED 1.6 billion drop in the third quarter. Is that early repayments or these are scheduled repayments coming through?

Yes. No, I think it's again a market dynamic because we've seen some of the government entities quite cash-rich and either rescheduling or restructuring the financing actually full repayment as well. And it has to do with some of the IPOs which happened and which is okay, right? Our share of that repayment happened in quarter 3 as well. Other banks have probably seen a similar phenomenon. But I think the good thing is that we're able to cover the repayments and also grown that and that's why while wholesale banks might see flat, it's actually underlying growing quite healthy. Now Q4, I'm not seeing -- at least there's nothing in sight for any scheduled repayment. We only know when the quarter is over. But at least there's nothing scheduled. And hence, what we have in the pipeline and actually already disclosed in October would suggest that we will have a strong close for the year as well.

We have 2 minutes for the very last and brief question, [ Ahmed Kamal ], please, over to you.

Congratulations, Mohamed on the new role. Just quickly on the sensitivity that you have mentioned. So AED 120 million cut for every 50 basis points, cut in interest rates. Is that on the net income level or interest income level. Given that we believe that for the interest rate cuts, it should be accompanied by a higher loan growth and more like increasing fee generation. So is that taking into consideration the volume growth or it's not?

Thank you, first of all, for your wishes. And I think very good question. When we do sensitivity, we always based on our bank's as is basis, right? If the balance sheet would be at today's point and you assume a curve shift by that specific basis point, that's your impact. Now that's why we are running with the volume growth and a healthy level to offset some of this as well. But yes, the AED 120 million, 50 basis points is based on today's balance sheet.

Thank you, everyone, for participating in today's call, and thank you, ADIB, management team for hosting this call today. Thank you.

Thank you, Olga. Thank you, everyone. And if you have any further questions, just drop us a line. Thank you.

Thank you all.

Thank you.